Investment advisory firms and broker-dealers with subsidiaries or affiliates in the United Kingdom will need to follow two new sets of “expectations” for dual-regulated firms and solo-regulated firms issued recently by the U.K.’s Financial Conduct Authority and Prudential Regulation Authority. The statements lay out the regulators’ views on senior management responsibilities, temporary staff arrangements, furloughed staff and more in the wake of COVID-19.
“We recognize that firms directly affected by coronavirus will need to keep their governance arrangements under review and make appropriate changes as circumstances change,” the FCA said in its statement for solo-regulated firms. “We do not require firms to have a single senior manager responsible for their coronavirus response. Firms should allocate these responsibilities in the way which best enables them to manage the risks they face.”
The statement for dual-regulated firms, issued jointly by the FCA and the PRA, take a similar approach. “We recognize that firms directly affected by coronavirus will need to keep their governance arrangement under review,” it states. “Where we can, we intend to provide flexibility to FCA and PRA dual-regulated firms.”
“In the midst of COVID-19, FCA-authorized firms need to operate fluid, flexible governance arrangements and be given appropriate space by the regulator in which to focus on managing their business properly at this difficult time, regulatory burdens minimized where
appropriate,” said Morgan Lewis partner William Yonge.
Sidley Austin partner Leonard Ng contrasted the FCA’s approach of not requiring firms to have a single senior manager with the agency’s approach on other issues, such as the requirement to have a single senior manager be responsible for overseeing LIBOR transition at the firm. “That said, it is important to remember that, in relation to identifying ‘key workers’ who are allowed to continue to go to the office, the FCA and PRA do expect the firm’s CEO – which is of course a ‘senior manager SMF1’ – to be allocated that responsibility. Given that there are commercial pressures at play, including the desire for banks and brokers to have trading staff (who might not be ‘key workers’) in the office, this ensures that there is accountability at the CEO level.”
U.S. advisers and broker-dealers doing business in the U.K. need to keep in mind that these statements apply to them only if they have subsidiaries or affiliates in the U.K. “The term ‘firms’ refers only to U.K. PRA and FCA authorized firms,” he said. “There is no application to non-U.K. firms at all. So, for example, a U.S. broker-dealer or investment adviser would not be affected, but of course if it had a U.K. subsidiary/affiliate broker-dealer or sub-adviser, that U.K. entity would be a ‘firm’ subject to the statements.”
“This and other new guidance issued by U.K. regulators address operational resilience, identifying key roles and key workers, cover for emergency temporary absences, issues relating to unpaid leave when there is no work for an employee, call recordings, financial crime compliance and best execution,” said Mayer Brown attorney Emma Khoo. “Even more important may be how regulators will regard senior individuals at firms through a post-pandemic lens in relation to how they have treated their customers and made business decisions that directly impacted customers during the crisis.”
Following is a breakdown of the key points, some of which may seem a bit bureaucratic to domestic firms, from each statement (readers are advised to read the full statements).
The statement notes that there is a statutory “obligation” on firms to update and resubmit a statement of responsibilities (SoRs) when there are “significant changes” to senior management function (SMF) responsibilities.
“We are aware that ‘significant changes’ to an SMF’s responsibilities may be required in this period due to sickness or any other temporary situations as a result of the coronavirus issues,” it states. “We understand the operational challenges and are keen to ensure that firms prioritize their resources appropriately.” With that in mind, it said that the regulators:
- Expect firms to resubmit relevant SoRs as soon as reasonably practicable taking into account the current circumstances; and
- Understand that firms may take longer than usual to submit revised SoRs in the present environment.
As far as temporary arrangements for senior management functions are concerned, the statement notes that current rules allow individuals to perform such functions with approval for up to 12 weeks in a consecutive one-year period if their firm experiences an SMF vacancy that is temporary and/or reasonably unforeseen. Given the advent of the coronavirus, it says, the FCA and PRA are “gathering evidence on whether the 12-week rule is likely to give dual-regulated firms enough flexibility to deal with temporary absences of SMF. . . . If the FCA and PRA conclude that the 12-week rule is insufficient to allow firms to respond to temporary SMF absences linked to coronavirus, they will consider additional measures.”
As in the statement for dual-regulated firms, the FCA in its solo-regulated firms statement says that “we recognize that some firms may need to make temporary arrangements to cover absences or change senior manager responsibilities in direct response to the pandemic.”
In that regard, the FCA states that it wants to “minimize the burden to firms at this time,” and that “we do not intend to enforce the requirement on firms to submit updated statements of responsibilities” if the change is:
- Made to cover multiple sicknesses, or other temporary changes in responsibilities in direct response to the pandemic; and
- Temporary and expected to revert to the firm’s previous arrangements.
In terms of the 12-week rule, the solo-regulated firm statement is a bit different than the dual-regulated firm statement. The solo-regulated firm statement says that “if temporary arrangements last longer than 12 weeks as a result of the crisis, firms can notify us that they consent to a modification of the 12-week rule. In these cases, temporary arrangements can be extended up to 36 weeks.”